Friday, September 9, 2011

Investing: A Post 9/11 Portfolio I

Many things have changed since 9/11, many changes were caused by this traumatic event. The world got more suspicious and more paranoid. Being an economist & investor it interests me how the market reacts on the growing paranoia.

There is an obvious trend: People and the governments, who depend upon their votes, want more security, whatever that means. Almost everywhere we see more controls and more surveillance. Airports especially, and other public places are more and more controlled by more or less sophisticated measures. Big Brother is growing.

1. Dividends from Big Brother?

The high vulnerabiity for airplanes, airports and other public devices and places caused a new and expanding industry which deals with these risks. Visitors to the USA are now familiar with the eye- and finger-scanners that US Homeland Security uses for immigration control. One leading manufacturer is L-3 Communications Holdings (NYSE: LLL finance.yahoo). This big technology conglomerate (with market capitalization around $7 billion) also offers full-body scanners which are already in place at Amsterdam´s Schiphol Airport.

Although LLL has a lot of market opportunities, the company relies upon US defense spending. In the last 2 years the stock performed weaker than the U.S. stock market (S&P 500) and has lost around 30% since July! Maybe the risk, that U.S. government expense cuts to control the disturbing budget deficit, put the stock under pressure. Speculations about the US deficit and US military expenses could therefore generate huge fluctuations for this stock price! Otherwise the sentiment for LLL might rekindle if there is more demand for security products.

Investors should also consider, that LLL is not alone, and has to deal with a lot of (hungry) competitors. One of them is OSI Systems (Nasdaq: OSIS finance.yahoo.com) which also produces X-Ray machines for security checks. Their products "are used to inspect baggage, cargo, vehicles, and other objects for weapons, explosives, drugs, and other contraband, as well as to screen people" reports Yahoo Finance. But they are much smaller (market capitalization is just $ 600 million) than LLL and therefore they are riskier. Like LLL their stock suffered a recent setback, probably because of U.S. budget problems.

Their common rival American Science and Engineering (Nasdaq: ASEI finance.yahoo.com) "engages in the development, manufacture, marketing, and sale of X-ray inspection systems for detection and security screening solutions in the United States and internationally", per Yahoo Finance. Some of their products can check for explosives under clothes. "Its products search cargo at ports, airports and train centers across the country. The company has products to screen cars and trucks as well human beings", reports TheStreet.com. The stock (market capitalization about $ 600 million) was also recently weak.

Another competitor is FLIR Systems (Nasdaq: FLIR finance.yahoo.com) with a market capitalization of around $4 billion. They produce authentication technologies. Such devices rely on sensor cameras, key cards and scanners to collect and verify data. They are focused "on thermal imaging systems that enable the watchers to see at night. In addition, the company's detection division helps design instruments to detect biological, chemical, nuclear and radiological threats to homeland security" writes one expert on TheStreet.com. Guess what? Their stock performance was weak too.

One another is I.D. Systems (NYSE: IDSY finance.yahoo.com). They offer face recognition systems and software which should protect against counterfeit IDs, created from stolen identities. The stock performed much better than LLL and the stock market and gained 60% since begin of the year. But the company is very small (market capitalization just around $ 57 million). Therefore the stock is very risky & speculative.

Investors who want to play the Chinese stock market, which is even more risky than Wall Street, can try their luck with China Security & Surveillance Technology, Inc. The stock is traded on the New York Stock Exchange with the symbol CSR ( finance.yahoo.com). They have at least one advantage: They don`t depend on the clammy U.S. budget.